Paypal is a very convenient tool for business owners but it can be a bookkeeping nightmare if not set up and entered correctly in the accounting software. I often time see missing information and duplicated transfers when reviewing books for businesses that use Paypal.
To avoid inaccurate reports and expensive cleanups, Paypal needs to be treated as a bank account for accounting purposes to ensure that things are recorded properly and nothing is missed. Any movement of funds between your bank or credit card account and Paypal needs to be recorded as transfers.
Below are some tips:
1- Setup Paypal as a bank account in your accounting software
2- Connect Paypal bank feed to your accounting software if available- this is an optional step but it can save you a lot of time on manual data entry if you have more than a couple of transactions per month. This also will automatically import the fees that Paypal charges so you won’t forget to record them.
When doing your own books:
1- Process the Paypal bank feed first:
Post expenses- check to be sure the correct expense account is selected.
Post income transactions- check to be sure the correct income account is selected and that fees are recorded.
Post transfers to the bank or credit card- check to be sure that the correct bank or credit card account is selected.
2- Go to the bank or credit card feed and “match” the transfers, do not use the “add” function or the transfers will be duplicated.
3- Reconcile Paypal just like any other bank account by downloading the statement from their website. Statements are automatically available on the 10th of the month but you can request it beginning on the 2nd of the month.
To download Paypal statements to reconcile, log on to your account and from the main navigation bar select to “All Activity”-> “All Reports” -> “Statements” -> “Monthly”
While not required, tweaking settings within Paypal can help reduce bookkeeping confusion and potential errors if you both receive income and make payments from your Paypal account. Below are 2 settings you can enable to make your life (and your accountant’s) easier.
1- Default payment settings- Select a bank or credit card as the default payment source, not the Paypal Balance
2- Auto transfer Paypal balance to the bank account every day
If you have been using Paypal and not sure if you have been entering it correctly, we can help review and fix it so you can rely on your financial reports again.